In an opinion issued yesterday in two consolidated cases, the Eleventh Circuit Court of Appeals determined that “a particular subset of creditors—debt collectors”—may be liable under the Fair Debt Collection Practices Act (FDCPA) for bankruptcy Proof of Claim filings on debt they know to be time-barred. Both cases were appeals from decisions from the United States District Court for the Southern District of Alabama.

Aleida Johnson filed a Chapter 13 bankruptcy petition in March 2014. In May 2014, Midland Funding, LLC (“Midland”) filed a proof of claim in her case, seeking payment of $1,879.71. Midland is a buyer of unpaid debt. Midland’s claim against Ms. Johnson originated with Fingerhut Credit Advantage, and the date of the last transaction on her account was listed as May 2003. This was over ten years before Ms. Johnson filed for bankruptcy. The claim arose in Alabama, where the statute of limitations for a creditor to collect an overdue debt is six years.

Judy Brock also filed a Chapter 13 bankruptcy petition. Ms. Brock filed her petition in April 2014; in June 2014, Resurgent Capital Services, L.P. (“Resurgent”) filed a proof of claim seeking payment of $4,155.40. Resurgent is a “manager and servicer of domestic and international consumer debt portfolios for credit grantors and debt buyers.” Resurgent’s filing was an attempt to collect Ms. Brock’s debt on behalf of LVNV Funding, LLC, which is a purchaser of unpaid debt like Midland. Ms. Brock’s debt originated with Washington Mutual Bank, N.A., and the date of the last transaction on her account was January 2008. There had been no activity on her account for over six years before Ms. Brock filed for bankruptcy.

Ms. Johnson and Ms. Brock (together, “Plaintiffs”) sued their respective Creditors (Midland and Resurgent) under § 1692e of the FDCPA. That section of the FDCPA provides that “[a] debt collector may not use any false, deceptive, or misleading representation or means in connection with the collection of any debt.”

Both Plaintiffs alleged in their lawsuits that the claims on their face were barred by the relevant statute of limitations. They argued that the proofs of claim were thus “‘unfair,’ ‘unconscionable,’ ‘deceptive,’ and misleading” in violation of the FDCPA.

Midland moved to dismiss Ms. Johnson’s FDCPA suit, and the District Court granted the motion. The District Court read the Bankruptcy Code as “affirmatively authorizing a creditor to file a proof of claim—including one that is time-barred—if that creditor has a “right to payment” that has not been extinguished under applicable state law. The District Court identified tension between this provision of the Code and the FDCPA, which makes it unlawful to file a proof of claim known to be time-barred.” The court found this conflict to be irreconcilable and applied the doctrine of implied repeal to hold that a creditor’s right to file a time-barred claim under the Code precluded debtors from challenging that practice as a violation of the FDCPA in the Chapter 13 bankruptcy context.

In Ms. Brock’s later FDCPA suit, the District Court granted Resurgent’s motion for judgment on the pleadings based on the rationale and holding in Ms. Johnson’s case. The two cases were consolidated for this appeal.

In yesterday’s opinion the court returns to a similar case from July of 2014 that was also decided in the Eleventh Circuit (but different panel), Crawford v. LVNV Funding, LLC . insideARM published an article about this case on July 14, 2014. That story can be found here. In that case the Crawford court held that the filing of a Proof of Claim on time-barred debt was an FDCPA violation.

However, in a footnote in the Crawford decision, the panel said it “decline[d] to weigh in on a topic the district court artfully dodged: Whether the Code ‘preempts’ the FDCPA when creditors misbehave in bankruptcy.”

This case now answers the question left open in Crawford. In short, the court determined that the Bankruptcy Code does not preclude an FDCPA claim in the context of a Chapter 13 bankruptcy when a debt collector files a proof of claim it knows to be time-barred. The court stated: “We recognize that the Code allows creditors to file proofs of claim that appear on their face to be barred by the statute of limitations. However, when a particular type of creditor—a designated “debt collector” under the FDCPA—files a knowingly time-barred proof of claim in a debtor’s Chapter 13 bankruptcy, that debt collector will be vulnerable to a claim under the FDCPA. Our examination of these statutes leads us to conclude that the Code and the FDCPA can be read together in a coherent way.”

insideARM Perspective

This court drew a distinction between a mere “Creditor” and a “Debt Collector”. The court recognized that the FDCPA does not reach all “creditors.” The court noted that the FDCPA applies only to “debt collectors,” who are defined as “any person who . . . regularly collects or attempts to collect, directly or indirectly, debts owed or due or asserted to be owed or due another.” The court also noted that “debt collectors” are “a narrow subset of the universe of creditors who might file proofs of claim in a Chapter 13 bankruptcy and not all “creditors” who file a proof of claim in a Chapter 13 bankruptcy case can face potential FDCPA liability as “debt collectors.”

Finally, the court noted: “However, when that creditor is also a “debt collector” as defined by the FDCPA, the creditor may be liable under the FDCPA for “misleading” or “unfair” practices when it files a proof of claim on a debt that it knows to be time-barred, and in doing so “creates the misleading impression to the debtor that the debt collector can legally enforce the debt.”

insideARM provides an FDCPA case law grid that highlights many significant FDCPA cases. The grid may be found here. The gird is updated on a monthly basis courtesy of Joann Needleman from the Clark Hill law firm. A cursory review of the grid will show several cases relating to the filing of Proofs of Claims. The decisions are not consistent.

The lesson? Any “Debt Collector” filing of Proofs of Claims on accounts that may be outside the applicable Statute of Limitations is engaging in risky conduct.